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Ryan Responds: “What should go in your Operating Agreement?”

Ryan Responds trade name vs trademark

What Should go in your Operating Agreement?

In this Ryan Responds video, I go over some of the more important items that an Operating Agreement should cover. While, not an exhaustive list, it is illustrative of the conversations LLC members and managers should have with one another. Business partners should strive to have this organizational document meet their expectations. It is a contract after all.

We also provide a one-sheet if you would like to read more about Operating Agreements. Finally, if you have any questions about reviewing, drafting, or even disputing an operating agreement please contact us or an attorney in your relevant jurisdiction for an initial consultation.

If You have a Question for Future Ryan Responds Videos …

We launched this on a YouTube channel, as we hope to publish educational videos on other topics in the future. Finally, if there is a short question you want the answer to submit them to admin@hewbordenave.com with the Subject line “Ryan Responds”. Please keep your questions short, general, and related to a business topic. Please do not provide specific details of  your matter or attempt to seek direct and specific legal advice through this format. If you need assistance and legal services, then please schedule a consultation with an attorney in your relevant jurisdiction.

Thanks and Cheers!

RKH

Disclaimer: The content of this video is for general information purposes only. Nothing should be taken as legal advice for an individual cases or situations. The viewing of this video does not create an attorney-client relationship. If you need legal advice, please contact an attorney in your relevant jurisdiction.

No Draw the Law, But Come to my Contracts Talk Tomorrow!


Sorry, there will be no Draw the Law, as I work on finalizing the talk and closing a business deal.  Today’s post, was supposed to be on alternative dispute resolution in a breach of contract situation, but guess what?

I will be talking about that tomorrow at The Greenhouse Innovation Hub, I will be discussing ADR, what is a contract, answering your questions, and I along with Docracy, the NYC startup trying to make using legal agreements user-friendly, will be using sample agreements to walk you through basic contract law.

The information is as follows:

Hope to see you there!

-RKH

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Draw the Law: Contracts Part IV, Oral and Written Contracts

I finally come to a topic that many of you are familiar with, but probably still have questions or misconceptions about: oral contracts.

Are Oral Contracts Enforceable?

Yes, by the very nature of being a contract (remember from the prior weeks the definition of a contract) oral contracts are enforceable. The real problem comes from proving what the terms of the contract were because if you are depending on a court enforcing those terms remember it has to hear a whole series of he said, she said arguments.

Is it Dangerous to Ignore Oral Contracts?

Yes, most definitely. Even though they are harder to prove and enforce, a court will look to evidence where it is available. Mainly, this type of evidence is called course of conduct.

Example: Let’s say a content writer orally agrees to produce for website a blog post every 1st and 3rd Tuesday of the month with the website’s owner. The website owner agrees to pay the content writer $300.00 per month. They shake on it and for seven months the content writer meets these deadlines and the website owner pays. Let’s say for argument sake they do not e-mail each other or have any other piece of writing that evidences this agreement other than the postings and the website owner payments.

Now, let’s say after those seven months one of them does not perform as they promised. Either the content writer stops posting or the website owner stops paying. A lawsuit is filed and now a court must figure out if there is a contract.  This is where a course of conduct argument will be made to prove that a) there was a contract and b) every time the content writer wrote he got paid.

Now, back to the Real World . . .

Notice, that I excluded e-mails, receipts, payment stubs, and the like from the example. Even if the original contract was oral, generally speaking, we always have a lot of actions and pieces of evidence that show what the contours of the agreement were. It may never be precise, but that is where the court steps in to try and figure out what the contract was, but that is why attorneys insist on substantial agreements be in writing.

Bottom line: do you want to define your contract or do you want a court to do it for you? 

Are there Some Unenforceable Oral Contracts?

Yes, there are a series of contracts, due to their subject matter, that MUST be in writing. While it depends on what state you are there are the general categories of subjects that MUST be in writing and signed by the parties who are obligated to keep the promises:

  1. Guaranty is a when someone else promises to be liable for the debt if the original debtor fails to pay (this is what banks use to pierce an entity’s limited liability and get at an owner’s personal assets);
  2. A promise that cannot be fulfilled within a year of when the promise was made;
  3. Anything involving land, an interest in land (including leases), or sale of real estate;
  4. A promise for the sale of goods worth equal to or more than $500.00;
  5. Promises to be executed after death, such as in a will or trust;
  6. The promise to sell stocks and/or bonds.


Lawyers Drafting or Reviewing Contracts

Remember that attorneys are wordsmiths. We write for a living. Therefore, if you have a sophisticated transaction consider having a lawyer draft it or for you or at the very least you draft it and have them review it and point on things. Oral contracts may be fine in some situations, but in today’s modern economy that is becoming rare. See you next time!

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*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

Draw the Law, People Issues X: Customers and Advertisements

Today’s Draw the Law will be brief (as I will be also posting about the next talk at The Box Jelly), but it will get us rolling in dealing with customers. For the past several weeks I have talked about mainly the employer-employee side of things of the business. While, there are a lot of other things to talk about in that kind of HR vein, as a way to break up the subject, I will now focus on the business-customer relationship.

Ads and Consumer Protection

Nowadays, there are a lot of consumer protection laws on the books as opposed to the old days where it was caveat emptor (“Let the buyer beware.”)  This can sometimes restrict the methods that you market or sell your products. However, one thing not to worry about is a simple advertisement.

Often, business owners ask me if I put out this ad, is it a contract between me and the potential customers?

In general, your regular ad is not going to create contracts with everyone who reads it. It does depend on the words used. However, for a contract to be formed you need an (1) offer, then (2) acceptance, and finally (3) consideration. A store’s ad is not considered an offer, but “an invitation to bargain.”

Exceptions: “Free Gift” or “First Hundred Customers Get Special Discount”

Unless, you intend to actually give a free gift or give a special discount for some special action taken by a customer don’t make these kinds of promises. In this cases, the customer can accept the offer, and their consideration is taking the extra or special action.

False Advertising

Without going too deep into the various laws just realize there are laws that counteract “lying.” For example, don’t label a product from somewhere that it is not and don’t state that your service is of a certain level or caliber (i.e. master carpenter) when it is not. These will lead you to give a false impression.

What you should do is be accurate about material aspects of the product or services that you offer. The word material means a representation, statement, or depiction (so pictures) in the ad would likely affect a consumer’s purchase or use of the advertised products. Basically, does the aspect you are talking about important to a reasonable person to make a decision to purchase your product or service?

Puffery

It is one thing to say your cake is the “best one on the block” versus your cakes will “always be enough to serve a party of 10.” Puffery is that act of exaggerating things that we all understand is someone just promoting their product or service. Mere puffery is ok, but when you start stating things as fact or categorically true and it is not you have entered deceptive advertising waters.

Bait-and-Switch

We know about “bait-and-switch” practices thanks to the numerous lawsuits and complaints against car dealerships. However, it can be applied to most other situations. In general, do not place the “bait” in an ad luring the customer to the storefront knowing full well you won’t have that product, and intend to “switch” it by focusing the customers attention to something else (in general more expensive than the deal “bait”).

If you really have a limited supply it is best to tell that in the ad. The deal lasts as long as supplies are available, and that supplies are limited rather than leaving out the deal dangling out.

Last Word

Have a process when making an ad. Here is an example of a checklist to go through to consider when making an ad and trying to avoid headaches:

  1. Consider the product or service – what do you want to emphasize in an ad?
  2. Is what your emphasizing trying to be factual?
  3. Are you making it a material claim?
  4. If you decide to compare your material aspects against a competitor’s be very careful of the claims you make – in short they better be true.
  5. If you are trying promotional sales or discounting be clear about what it is you are offering
  6. Don’t do a bait-and-switch!
  7. Lastly, be sure to double check the prices and pictures.

Don’t forget to “Subscribe” to this blawg and have an Aloha Friday!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

Draw the Law: Buying a Business or into a Franchise

In my previous post I discussed raising capital through governmental loans and programs.  Today’s Draw the Law topic is about deciding to buy a business or its assets and franchise agreements.

Say you come to the realization that you don’t mind owning a business that someone else has built up.  The culture, the image, the stuff walls and tiles – all of it looks great!  You probably would then explore buying the business or if it is a part of a chain entering into a franchise agreement.

Buying a Business: Why Start from Scratch?

Exchanging Information: Getting to Know Each Other

Let’s say you want to buy the mom and pop store that makes shave ice down the road.  The first thing you will always need, and it remains true of all business transactions, is information.   The information you will need is your credit worthiness, financials, and the like – why?  Because the seller of the business wants to know if you can afford the business and in exchange you will ask for the books from the shave ice store.  Just because the business is always crowded with tourists does not necessarily make it the moneymaker you are expecting.  You want to know if they own the space they are in or leasing, is all the equipment paid up or are there liens on them, what are the terms of the current employees’ contracts, etc . . .  The only way you as the buyer of the business know it is worth it for you is to see if you are getting what you bargained for, and that means you will need to prove to the seller that you can pay them the price you will settle on.

Buy the Business or the Assets?

Do you want the body or the guts?  That is one of the most basic questions you want to know.  Do you just want the stuff that makes up the business, which includes equipment, facilities, and intangible property like trademarks?  Or has the business been successful over the years because of the contracts it has in place (as it is the business entity that signed all those agreements)?

You will have to decide which is more beneficial.  Just buying the assets is like removing the hermit crab from its shell; you leave behind the corporate entity and anything attached to it similar to how an anemone is left on the shell when the crab moves.  Similarly, any contracts, lawsuits, and such liabilities are left with the corporation.

The Process: Start to Close

In general, the process is a lot of review, negotiating, and the finalizing of details.  Are the sellers telling you everything?  Can you get a look at the records and books?  How will you pay for the business?  If it is in monthly installments how will they accept payment?  Operationally, how will the transfer work out?  Like the transfer of accounts, titles, etc. . . .  Finally, when all that is reduced to writing you can sign the contract.  Of course, this does not happen overnight and you will probably need to work with a group of experts, such as a business broker, an accountant, your banker, an attorney, and the seller’s people to get this to all happen.

Non-compete Agreement and Warranties

Non-competes and warranties are things you will agree to before the deal is completed, but care about what happens after the business is in your hands.  The business you just bought or its assets are not worth much if the seller goes and starts the same exact business.   Therefore, you get assurances from the seller that they will not be your competition by placing a non-compete clause in the sales agreement or draft a completely separate document.  Either way, there are some restrictions on how much you can limit or prevent the seller from starting a similar business. Oft times, a buyer will actually retain the seller on as an employee or consultant to ease the transition, and thus is another way to prevent competition from the former business owner.

A warranty gives you, the buyer a right to go after the seller if an undisclosed liability comes up after the transaction is complete.  Let’s say you buy the shave ice store, but the former owners forgot to tell you that some of their customers had gotten stomachaches from food poisoning.  Those customers then sue you, as you have become the new owner of the business.  If you had a proper warranty clause you would be able to go after the former owners for what the customers are suing you for.

Franchising: What Comes with the Name?

When you buy a franchise you are buying a business.  Generally, it is a business with brand recognition and with that recognition comes all the inner workings of that brand from its trademark to its secret recipes you get it all.  It even includes how the storefront will look.  Typically, especially if it is one of the national brands, you will be paying a lot of money, and why not?  You would be paying for a brand name that has a proven track record (but like any business, you should realize that does not always mean success).

Pros

  • Experience – the franchisor (the entity you are buying the franchise from) will help you with all their experience and knowledge get started.  If you are new, this is definitely something that will help you get up to speed.
  • Advertising – you are now apart of the franchises chain of distribution, therefore it is in their interest to coordinate marketing and advertising with you.  National sales campaign?  You will probably be sent all the material and have it all set-up for you.
  • Established – all the time spent creating a name and image has paid off for the company, and you are paying a fee or royalties so you can use that name and everything associated with it.
  • Lower operational costs – because you are getting all your products and supplies from the franchisor it is usually at a reduced cost and therefore, it is less costly for you to operate than if you had to buy all that stuff on your own.

Cons

  • Lost of control – the strength of a brand name and image comes from consistency.  When you enter a famous fast food chain in another state or even country you expect the same products and services you would expect locally.  To accomplish this feat, the franchisor restricts what you can do with the storefront.
  • Favoring the Franchisor – the franchisor is in the business of making money, naturally, the agreement they are going to have you sign favors them.  Some factors that favor them are the following:
    • Royalty fees – usually, paid on monthly gross sales and not profit, therefore you pay even if you aren’t making money
    • Restriction on transfer – you may not be able to sell the franchise and it may only be back to the franchisor
    • Termination at their discretion – the franchisor may end the agreement when they feel you are not cooperating leaving you high and dry
    • Competition – the franchisor can sell as many franchises as they wish, which includes your neighbor who also wants to buy into the franchise
    • Trapped – you might be forced to only buy supplies and products from the franchisor and be unable to go to outside supplies
    • Paperwork – the franchise wants to see you are making the most of your relationship with them, and thus would like to see reports from you, on a monthly, even weekly basis.

Just as a heads up the next several draw the posts will concern itself selecting a location for your business and the people involved with your business (employees, vendors, and customers).  Don’t forget if you enjoy this series or any of the other series on my blawg feel free to subscribe in the right-hand corner of this page to receive e-mail updates on posts.  If you are on Facebook be sure to “Like” “Ryan K. Hew” to get updates there as well.

See you on the next draw!

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.   No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.   Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.